News  Gamuda announced that it is acquiring a piece of agricultural leasehold land (99 years until 2111) from Bukit Melati Sdn Bhd totalling 104.1ha (257.2 acres) in Mukim Tanjong 12, Daerah Kuala Langat (2 km from Kota Kemuning) for RM392.2m (RM35.00 psf).

 The acquisition will be funded via internally generated funds and it is expected to complete in 2Q15.

Comments  We were not surprised with the news as the group did indicate earlier that it is allocating around RM1.0-RM1.5b worth of capex for landbanking this year. Including this land, the group has invested about RM1.2b. All in, we are Positive on this news as: (i) the land price of RM35 psf is relatively fair vis-à-vis market price of agricultural land in Kota Kemuning of about RM80 psf. This land is cheaper we believe due to the area is 2km away from Kota Kemuning (ii) the land acquisition is in line with its medium-to-long-term plan to boost the group’s landbank profile. Including this land, we estimate its Malaysian landbank to increase by 8.4% to 3,317 acres, (iii) Gamuda’s landbank in Kota Kemuning is depleting (only 10 acres left); hence this land acquisition is timely to extend its exposure there.

 Note that Kota Kemuning was one of its most successful townships. Hence, due to the group’s strong track record coupled with accessibility to the area with nearby existing highways such as KESAS and LKSA and upcoming new connections to ELITE and SKVE highways, we believe the group would fetch healthy take-ups for project on this new land. As of now, the project’s GDV has yet to be revealed. For illustration purposes, assuming land cost constitutes 10-15% of the land’s GDV, the land could fetch RM2.6- RM4.0b worth of GDV.

 Net gearing would increase to 0.52x from an estimate of 0.44x (after taking into account the recent land acquisition which has yet to be booked in) after this acquisition. We think 0.52x is still manageable, judging from its peers’ 0.4x-0.6x.

Outlook  While the proposed acquisition of the land is part of their landbanking activities to boost its earnings growth for the property division over the long-term, we remain upbeat on its construction division given that its well-progressed KVMRT1 and upcoming KVMRT2 projects will continue to provide earnings visibility for the group over short-to-long-term.

Forecast  No change in our earnings estimates at this juncture pending completion of this exercise and more details on the launch of the project.

Rating Maintain OUTPERFORM

 We believe Gamuda will be the biggest beneficiary of more KVMRT2 newsflow in the near-medium-term and possible positive outcome of SPLASH’s negotiation with Selangor and federal governments in the near-term.

Valuation  Pending management guidance on the project’s GDV, we maintain our SoP-based Target Price of RM5.52, implying FY15PER of 17x (in line with its 5-year average fwd-PER). Assuming the land could fetch RM2.6b-RM4.0b worth of GDV (assuming land cost is 10%-15% of GDV) with duration of 10 years, our SoP is likely to increase to RM5.68 – RM5.77.

 Nonetheless, we are now reviewing our property RNAV in our SoP valuation following our cautious outlook on property sector (see our Property sector report yesterday). Currently, we apply 30% to the property RNAV and may consider widening the discount further, pending our property analyst’s call on the sector.

Risks to Our Call  Delays in KVMRT1 construction progress

 Unexpected scrapping of KVMRT2 project

 Another deadlock in SPLASH takeover deal

 Higher-than-expected input costs,

 Lower-than-expected property sales or/and margins.

Source: Kenanga